Thursday, March 5, 2009

House Passes Cramdown Legislation

The House approved a hotly-contested measure that would grant bankruptcy judges the authority to alter mortgage terms to help homeowners skirt foreclosure, 234- 191, in a late Thursday vote.

Bankruptcy courts are currently barred from rewriting the loan terms on a primary residence, but under the proposed legislation, judges could reduce the interest rate, reduce the principal or extend the life of an existing loan — but only for loans underwritten prior to the enactment of the bill, at least for now.

The bill, called the Helping Families Save Their Homes Act of 2009, has been painted by key Democratic lawmakers as essential in easing the housing crisis, and was central to President Obama’s election platform; nonetheless, the original version hit a snag last week when some Democrats, who likely heard complaints from the lending community and even the general public, voiced their concerns that homeowners might abuse bankruptcy to obtain reductions in mortgages they can actually still afford.

“Our intention was to make sure this was available, but as a last resort,” said Ellen Tauscher (D-CA), a leader in the quest for provisions.

Tauscher, joined by colleagues Zoe Lofgren (D-CA) and Dennis Cardoza (D-CA), helped to hammer out a compromise to the housing bill. The compromise requires bankruptcy judges to consider whether banks offered homeowners a “qualified” loan modification –- defined as one that set monthly payments equal to approximately one-third of a borrower’s income — before opting to grant judicial aid.

“The concern is that we want to ensure that those people who get relief have tried other avenues,” House majority leader Steny Hoyer, (D-MA), said Tuesday, according to Yahoo! News. In other words, borrowers must prove they’ve thoroughly attempted to help themselves, although critics suggest such hurdles are more a decoration than any real impetus to preventing the abuse of the bankruptcy system.

The revised bill would require homeowners facing foreclosure to seek a loan modification 30 days prior to pursuing one in court, and provide their lender with the necessary personal financial information — “not just [make] a phone call to an answering machine,” said Lofgren.

Judges would also have to use federally approved appraisal guidelines in determining a home’s value and weigh a borrower’s income against their current payments before deciding whether an interest rate or principal reduction was essential.

“Some may think the changes made to the bill go too far, while others will contend that they do not go far enough,” wrote Tauscher, Lofgren and Cardoza to their colleagues. “Given the ever deepening housing crisis, however, we ask you to place such differences aside — as we have done — and support this effort.” Democrats say the legislation could cut foreclosures 20 percent.

The mortgage industry still argues that such loose access to bankruptcy court mortgage modifications could impose significant costs on its companies, which would eventually be handed off to borrowers in the form of higher fees and rates — although, the revised bill may seem somewhat more appealing to the mortgage industry.

Efforts to pass cramdown legislation has faced tough opposition in the Senate, too, at least previously, which could consider its own version of the bill later this month according to sources.